Congress never intended to subject mom-and-pop shops to Sarbanes-Oxley

We all remember the Enron debacle. Investors lost millions when it came to light that the corporation had inflated information — or outright lied — about its assets and profits. Understandably, the public was outraged. Accordingly, Congress took action to prevent “publicly traded companies” from engaging in this sort of fraud in the future.

To that end, Congress passed the Sarbanes-Oxley Act, which provided special whistleblower protections for employees of publically traded corporations. The whole idea was to protect those of us who choose to invest in publically traded corporations by encouraging corporate employees to report indiscretions early on. Of course most small business owners have never heard of Sarbanes-Oxley. And why should they?

Small business owners were never implicated in the Enron scandal, except to the extent that they had personally invested in Enron stocks before the company’s collapse. What is more, Sarbanes-Oxley—which was meant to prevent the next Enron implosion—was targeted at publically traded corporations, not small business. To be sure, the debate on the floor of Congress made clear that Sarbanes-Oxley was never intended to impact small business whatsoever.

For one, there was no reason to bring small business into the Sarbanes-Oxley regulatory regime because Congress was only concerned about preventing public corporations from misleading potential investors. Small businesses were simply thought to be exempt. But, today the Supreme Court is hearing oral arguments in a case in which aggressive plaintiff attorneys — and the Obama Administration — are insisting that the act’s whistleblower protections should apply to the employees of independent companies.

To defend the interests of mom-and-pop companies throughout the country, the National Federation of Independent Business (NFIB) Small Business Legal Center filed an amicus brief to make clear that extending Sarbanes-Oxley would result in tremendous new costs for small business. For one, most small businesses lack the resources to hire a team of in-house attorneys to help navigate through the complex Sarbanes-Oxley regime. Still more concerning is that, by extending Sarbanes-Oxley to small businesses we would be opening the flood gates for new lawsuits against companies that are already struggling in this tepid economy.

In a country already dealing with a frivolous lawsuit problem, the last thing we need is to open the door for ex-employees to begin suing under a law that Congress never intended should apply to small business. The truth is that if the Court extends Sarbanes-Oxley to non-publicly traded companies, small business owners will be walking through a legal minefield whenever dealing with sensitive information. This is because Sarbanes-Oxley authorizes “whistleblowers” to sue their employer after reporting a perceived impropriety whenever it appears that the company has taken an adverse action against the employee. Even unsubstantiated allegations will result in costly legal battles for small business owners.